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Why would auto dismantlers tow away their own profits?

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The roller coaster that carried shredded auto scrap to $125 a long ton from $605 in four months buffeted other passengers beside scrapyards and mills. Auto dismantlers, who supply shredders with most of their vehicles, were whipsawed as well.

The predominant function of such companies, at least in normal times, is to remove useful parts and components from defunct vehicles for sale. Hulks may sit in a yard for 90 days to three years, waiting to be cannibalized. A typical revenue ratio would be 70 percent from parts and 30 percent from shredders buying what's left. But not in the 2007-08 run-up.

"Everybody got greedy on the scrap," said Joey Devereux, vice president at Available Auto Parts, Decatur, Ill. "Late-model yards stopped obtaining late-model salvage (for parts). They kept buying junk cars to keep the process going at the shredders. It was such huge profits, very quickly. They should have been buying half-good cars and half-scrap cars. For a lot of guys, now that they're having to rely on parts sales again, there are some hardships coming. They let their inventories dwindle."

Many parts may not be removed immediately. The typical strategy is to leave a defunct vehicle in the yard until someone wants to remove a piece of it to repair a similar vehicle still on the road.

"We look at the parts potential, whether it's the starter, the alternator, the door glass, a good motor or transmission. When that factor is included, the scrap processor can't compete," Devereux said.

But soaring scrap prices reduced the attention paid to parts. During that period, he said, dismantlers were probably getting half their revenue from shredders, not the usual 30 percent. "When a car came to the (salvage) recycler, they were grabbing radiators, condensers, catalytic converters and the aluminum wheels and then sending the (rest of the) car to the crusher" for shipment to the shredder, Devereux said. "In less than four or five days, that vehicle was gone."

That's not normal practice, he noted. "If a recycler buys a nice piece of salvage, say at an auction, 12 or 14 months minimum is what guys would hold the car for" when the situation is reasonably normal. "If it's an above-average truck, it's probably a three-year turn. Even something off the street is probably a 90-day turn, maybe six months."

Aside from distorting the priorities of dismantlers, shredders' high prices also diverted customers who normally would have dealt with local auto yards, Devereux said. "The shredders outbid us when the price was up. The advantage that they had is, they had an actual scale. Knowing the exact weight, they had a margin they knew they could work on."

Shredders recover the metal values of nonferrous parts on the output side, grinding the mixed metals up and then sorting by density. A few items avoid that fate, such as wheels. "Shredders would pull out the catalytic converters. They will pull the radiator and condenser in most cases. It gets them more nonferrous in the long run. And they have to get the batteries out, because lead is a real (pollution) problem," Devereux said.

He remembers with chagrin the situation at the height of the price cycle in the second quarter. "The shredders in metropolitan areas were allowing John Q. Public off the street and they're offering $200 a (short) ton. And he says 'This is great' and tells his neighbor he should do the same thing." Before the run-up, payments were normally $25 to $50 per discarded vehicle.

These days, dismantlers have refocused themselves on parts and no longer have to pay top dollar for ordinary defunct vehicles. But the after-effects of the roller coaster ride are still being felt. "A huge number of cars got sucked out of the system that should not have been sucked out of the system, due to the fact that the price was so high," Devereux said. Vehicles that had another year of decent service left in them vanished from the road prematurely, so many vehicles that would have entered dismantlers' lots in late 2008 and early 2009 won't be doing so because they were enticed out of service by the briefly high prices.

Devereux said he would expect his 17-acre yard normally to have an intake of 150 vehicles a month but the recent pace has been 50, he said.

The collapse in the market was made clear during the mid-September week when Congress was debating whether to bail out the credit market. "In all the years I've been in the business, I never remember a scrap processor not accepting my loads. There were times when we went to sell our copper and we were told, 'No, I'm not buying right now, I'm holding'." That wasn't normal behavior for a slowdown. "They might tell you 10 cents. They might give you a ridiculous price you both laugh about. But for them to not even quote, that was something different."

The Thursday when Congress was waffling on the bailout "literally reminded us of 9/11. Business came to a screeching halt. The scrap market jammed up. We immediately started laying people off," cutting the payroll to eight employees from 12.

But Devereux says he can remember worse. The current situation isn't as bad as the early 1980s, when a stressful environment was accompanied by high interest rates. "Your note at the bank and your lines of credit were 20, 21 percent then. When your money (from sales) stopped, you still owed 21 percent on your obligations at the bank. Nobody's getting shut off or having their notes called like you did in the '80s. This time around we haven't been buying any equipment. We don't have any large obligations at the bank and our rates at the bank are still at historical lows."

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